Former customers of collapsed crypto companies such as Celsius Network and Voyager Digital reportedly face the possibility of paying income tax on funds still held by the bankrupt entities.
As per a Bloomberg report, some Celsius customers have received 1099 tax forms showing they owe income tax on the interest they earned from investments locked up in the fallen crypto lender’s accounts.
IRS demanding tax on income locked in bankruptcy dealings
U.S. tax laws require citizens to pay income tax on any interest earned from corporate bonds, bank accounts, certificates of deposit, or other financial instruments, including crypto investments.
Taxpayers pay income tax for the year the interest is generated. Unfortunately, many crypto investors have their funds frozen on platforms that went bankrupt in last year’s hard-hitting crypto winter.
For instance, Celsius Digital halted all customer withdrawals in June 2022 due to “extreme market conditions.” At the time, the crypto lender managed more than $11 billion of customer assets. Celsius locked up the assets as part of a long-winded bankruptcy case whose end and outcome are yet unknown.
U.S. citizens must complete their federal income tax returns by April 18, 2023, and are expected to give details of all their income for the past year. The income tax rate ranges between 10% and 37% depending on where a person falls in the income bracket.
The Bloomberg report cited the example of a Florida software designer who allegedly received a 1099 tax form from the Internal Revenue Service (IRS) for $8,000 he earned in interest from more than $200,000 he invested in Celsius.
Unfortunately for the man, all that money is currently locked up in Celsius, awaiting the bankruptcy court’s decision.
Income doesn’t count as capital loss just yet
Legally, everyone is required to pay income tax, but the receipt of a 1099 tax form usually means the taxman is fully aware of your taxable income. However, the IRS’s decision to demand taxes from payments locked up in companies during bankruptcy seems strange to observers.
Many have sought to determine whether assets locked up in collapsed crypto platforms can count as capital losses. Due to the IRS, taxpayers can write off as much as $3,000 from their yearly income when capital losses exceed capital gains.
But tax experts have advised that since the crypto platforms are in the middle of bankruptcy proceedings, taxpayers can’t count such losses.